GrainCorp to keep diversifying

A cashed-up
GrainCorp
is expected to seek further acquisitions amid rising global demand for food after bedding down a $472 million deal to create Australia’s largest integrated grains and edible oils processor.

GrainCorp chief Alison Watkins said the deal would further diversify the company’s earnings, which had been heavily skewed to the size of the east coast grains crop.

She said the decision to buy Gardner Smith and Integro was a logical, low-risk investment.

“We are not just buying one business, we are creating a new business," Ms Watkins said. “We are putting together an end-to-end, vertically integrated business starting from procurement with our own familiarity with canola and being an active buyer and seller of the canola crop, through to the crushing stage, through to the refining stage and through to the connection to customers."

GrainCorp shares are hovering at four-year highs and the company will exploit this strength to raise $159 million to fund part of its takeover of Goodman Fielder’s struggling commercial fats and oils business, Integro Foods, and Australia’s second largest oilseed crusher Gardner Smith.

It will fund the remainder of the deal with borrowings.

Analysts said the equity raising would set the group up for further acquisitions, which could include ­Ridley’s stockfeed business.

Shareholders in privately held Gardner Smith will walk away with $220 million, of which up to $121 million will be in GrainCorp stock priced at $9.79 a share and held in escrow for six months. With debt of $82 million, Gardner Smith’s enterprise value is $302 million.

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The business, 55 per cent owned by former Gardner Smith managing director Don Seaton, aged in his 80s, crushes about 300,000 tonnes of oilseeds annually and operates 12 bulk liquid terminals in Australia and New Zealand and one terminal in Shanghai.

Analysts were concerned that the 9.2 times earnings multiple GrainCorp was paying for Gardner, which generated average earnings of $33 million over the past five years, was too high, stoking fears GrainCorp might have made another top-of-the-market acquisition.

“Strategically it makes sense," said one analyst, who declined to be named. “But where I am yet to be convinced is on the value of the trans­action. It appears they are paying a very full price [for Gardner Smith]."

The deal is the largest since GrainCorp gobbled United Malt Holdings for $757 million in 2009. That deal, executed under previous managing director Mark Irwin, has been heavily criticised for failing to deliver promised “counter-cyclical" earnings.

Malt margins have fallen about 40 per cent since the deal as sluggish beer consumption globally has created excess supply of malting barley.

Gardner Smith had been the under bidder for Integro Foods twice, losing in 2009 to Cargill, which in turn had its $240 million offer stymied by the Australian Competition and Consumer Commission. Taking into account the $170 million GrainCorp will pay for Integro Foods, the combined businesses were valued at 7 times historical earnings, including $4 million in estimated synergies.

GrainCorp shares were placed in a trading halt until Friday as it completed a $159 million 1-for-11 pro-rata entitlement offer, fully underwritten by Credit Suisse.

The offer priced at $8.80 per share is a 10.6 per cent discount to its last traded price of $9.85. About $103 million would be raised through institutions and $56 million offered to retail shareholders.

RBS Morgans analyst Belinda Moore said using its historically strong share price to help fund the deal put GrainCorp in a strong position to benefit from continuing rationalisation occurring in the agricultural sector. “They have the firepower for further acquisitions," Ms Moore said.

Ms Watkins said using a mix of debt and equity ensured GrainCorp had the flexibility to grow its existing operations, offsetting the potential impact of poor weather on future crop production and allowing it to benefit from “accretive growth opportunities that we will find in the core business as well".

“This gives us the ability to weather a difficult year should one come along and also the ability to continue to go hard after the accretive growth investments that we see," Ms Watkins said.

Goodman struggled to manage commodity price volatility and Integro’s earnings had slumped from $52 million in 2009 to $30 million in 2012. It first tried to sell the business in 2009. Goodman expected to generate net proceeds of $165 million through the sale, most of which would be used to repay debt, negating the need for another capital raising.

Macquarie analyst Greg Dring said the deal appeared dilutive for Goodman, unless it was able to buy oils and finished goods from Integro more cheaply then what it cost to vertically manufacture them.

Under a supply deal struck with GrainCorp, Goodman will account for 40 per cent of Integro’s volumes.

“It makes sense putting the two businesses together," Commonwealth Bank of Australia analyst Jordan Rogers said. “GrainCorp will be able to procure canola a lot better than Gardner Smith and they can run Integro better than Goodman because they will have a much better sense of commodity costs."